Middle East EPCI activity on the rise

Saudi Aramco has been driving the highest amount of EPCI (engineering, procurement, construction, installation) activity in the Middle East in 2017. IHS Markit’s Mirzi Moralde takes a look at the region, history and context for OE. (First published in the January 2018 OE, access the full issue here).

Saudi Arabia’s state-owned oil company, Saudi Aramco has been leading the way in the tendering and contracting activities in the Middle East Gulf offshore construction market in the current low oil price environment.

Seven offshore engineering, procurement, construction and installation (EPCI) projects were awarded by Saudi Aramco, between January and November 2017, covering the Safaniya, Zuluf, Marjan, Berri and Manifa oil fields, as well as the non-associated Hasbah gas field. It is the highest number of EPCI contracts awarded since the market downturn in 2H 2014.

Saudi Aramco has the highest number of EPCI tenders released and projects awarded in 2017, which are under its offshore Maintain Potential Programme (MPP), compared to other operators in the region. Rolling out MPP will aid in sustaining and maintaining Saudi Aramco’s production capacity, which is at maximum around 12 MMb/d. In 2016, Saudi Aramco produced 10.5 MMb/d.

Urbanization in developing countries and rapid growth in global population in the decades ahead are expected to result in increased demand for reliable energy sources, like oil and gas, until a long-term transition to alternative energy sources to counter climate change could possibly meet a portion of future energy needs. Total primary energy demand is expected to increase by 35% in the period to 2040, and oil is expected to have the largest share in the energy mix in the forecast period, based on the Organization of the Petroleum Exporting Countries (OPEC) World Oil Outlook 2017.

Through the implementation of the MPP, Saudi Aramco will be able to readily respond to demand. It has earmarked around US$300 billion over the coming decade to secure its eminent position. A part of the investment plan aims to sustain Saudi Aramco’s spare oil production capacity as well as to carry out exploration and production focused on conventional and unconventional gas resources. The firm is also looking into innovation, technology and collaboration with nine other oil and gas companies in finding low-emissions solutions to provide clean energy as part of its commitment to the $1 billion Oil and Gas Climate Initiative (OGCI) investment fund.

EPCI awards

From 2015 to November 2017, 18 offshore EPCI projects were awarded by Saudi Aramco, after the price of oil plummeted.

Coming in second to Saudi Aramco in the contracting front in the Middle East Gulf region are Abu Dhabi National Oil Co. (ADNOC) subsidiaries Abu Dhabi Marine Operating Co. (ADMA-OPCO), Zakum Development Co. (ZADCO) and Abu Dhabi Gas Industries (GASCO), which are now collectively known under one brand identity, ADNOC. It awarded seven EPCI offshore contracts from 2014 until 2016, involving the Zakum, Nasr, Bu Haseer and Dalma fields. This is in line with Abu Dhabi’s goal of increasing production capacity to 3.5 MMb/d by 2018, in anticipation of a future hike in energy demand.

Looking back to 2H 2008, oil demand dropped at the onset of the global financial crisis, which also resulted in a low oil price environment until the global economy slowly showed signs of recovery by 2011, coupled with global disruption in supply in 2012, that brought back the oil price up again to over $100/bbl in 1H 2014. Thereafter, the oil price began its sudden descent to a low of around $40, triggered by higher supply than demand, as the global economy continued its slow recovery, while supply from non-conventional or shale oil in the US surged.

FieldsBase by IHS Markit shows that in 2008 and 2009, Saudi Aramco awarded two EPCI projects each year, closely followed by ADNOC, with one and three project awards, respectively. Saudi Aramco’s multi-billion Manifa oil field redevelopment project, covering platforms and pipelines, was granted to EPCI contractors in 2008, while in 2009 it started the development of its first offshore non-associated Karan gas field.

In 2010-2013, there were 16 projects awarded. Seven of these projects were granted in 2012. While for ADNOC in the same period, 14 projects were given green light. Data on awarded contracts from FieldsBase shows that Saudi Aramco has been consistent in implementing the MPP in a volatile oil price market.

However, it has also been cautious in granting contracts during the most challenging times. In 2014, there were no visible offshore EPCI projects awarded by Saudi Aramco, but a year after it granted a total of six MPP EPCI campaigns, followed by five in 2016 and seven until November 2017.

Initially, OPEC stood its ground to protect its market share but then eventually decided before the end of 2016, together with participating non-OPEC producing countries, to implement production adjustments or output reduction to help restore market balance. The adjustment commenced in January 2017, and initially ran for a period of six months until it was extended for nine more months or until the end of March 2018. This has been further extended to December 2018, following re-affirmation of the OPEC and non-OPEC Declaration of Cooperation with agreed voluntary production adjustments on 30 November last year, which aided in propping up the Brent crude to above $60/bbl.

Downward pressure on day rates

The low oil price has contributed to the downward pressure on day rates of construction vessels in the Middle East region, which started to gradually drop in 2015, after pre-downturn ranges tried to hold out until Q4 2014. The subsequent years became a period of re-calibration for contractors and operators. Although previously awarded projects are progressing to completion, some renegotiations for existing long-term contracts, which were awarded prior to the downturn, were also carried out to reflect the current EPCI market. The 2017 Q4 ranges for construction vessels’ bareboat day rates are now around half compared to 2014 ranges. Although, there seems to be a positive sentiment in the market with the oil price above $60 by the end of November, day rates are anticipated to recover likely in around eight months to a year’s time or until the $60/bbl price is stably sustained or improves further.

Based on data from ConstructionVesselBase by IHS Markit, as of November 2017, there are 138 construction vessels in the Gulf, and their utilization rate stands at 57%. This is higher than the average utilization rate of 41% worldwide. The global construction vessel fleet consists of 851 vessels. In the Middle East Gulf, there are 80 units currently engaged in work programs, 55 are either idle or cold stacked while three are inshore for repair, refit or survey. Out of the total number of units carrying out campaigns, 40 are performing either platform and pipeline installation, providing saturation diving or ROV support while another 40 are engaged in accommodation support services for either ongoing offshore construction or field maintenance work.

Most of these campaigns are being carried out in Saudi Arabia and Abu Dhabi in the United Arab Emirates (UAE). Other areas of activity are located offshore Egypt in the Gulf of Suez, Qatar and Iran in the Persian Gulf. With almost half of the Gulf fleet being out of work, discussions for a potential commitment could further bring down day rates, especially for low-end vessels.

At present, FieldsBase by IHS Markit indicates that Saudi Aramco has more than 100 offshore platforms under construction, which have been awarded as part of the MPP EPCI projects that are set to be installed in 2018 -2020. These projects went to Saudi Aramco’s pre-qualified LTA (long-term agreement) contractors: Dynamic Industries, Larsen & Toubro Hydrocarbon Engineering (LTHE) and its partner EMAS Chiyoda Subsea, McDermott, National Petroleum Construction Company (NPCC), and Saipem.

Under the LTA, they are qualified to bid for MPP work scopes. Several other platforms in the years ahead are also anticipated in upcoming EPCI packages, which are expected to be brought to tender as Saudi Aramco continues to carry out its MPP campaign to sustain production capacity of existing and mature fields. Platforms and pipelines are usually among the infrastructure involved in the MPP plan as well as modification and brownfield works.

About the author

Mirzi Moralde is a senior analyst for Petrodata by IHS Markit based in Dubai. Moralde covers the Middle East Gulf offshore oil and gas construction market, focusing on field development activities from discovery, engineering, procurement, construction, installation and production phases.